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Understanding income protection gaps: awareness, behaviour, choices

Why is income protection such an important issue for businesses?


A study by Zurich Insurance Group, the global insurer, and the Smith School of Enterprise and Environment at the University of Oxford on ‘income protection gaps’ (IPGs) based on a survey of over 11,000 respondents in 11 countries, has found that:

There is significant untapped demand for income protection insurance. Just over half (52 percent) of respondents without insurance say that they would be willing to consider buying it.

Personal experience of IPGs (whether first- or second-hand) is a bigger factor influencing demand than financial literacy. This may upend a number of assumptions about the effectiveness of financial education and literacy campaigns.

Professor Gordon L. Clark, the director of the Smith School of Enterprise and the Environment, University of Oxford points to a barrier in cost perception: “People are very conscious of the value for money in insurance, but the perceived cost is vastly exaggerated”.

“Moreover, people have to be convinced there’s some payoff beyond the automatic deduction from their income.”

Work status also plays a major role:

“Historically, most people were enrolled in life insurance through their employer, and often had no choice in the matter because it was a group insurance scheme.” continues Professor Clark, concluding that the rise of the sharing economy is putting more individuals at risk.

Older workers are more likely to lack – and need – protection. “The most important driver about when people retire, if they have the choice to retire, has to do with what their retirement income will look like” says Clark.

Failure to protect income in the event of disability or illness poses a significant challenge, both in traditional and emerging economies. For families, the impact of illness or disability on income can be devastating. But not only individuals and households suffer. Income protection gaps can also profoundly affect businesses, governments, and the economy as a whole, undermining productivity and eroding social ties.

The need for such protection is acute and rising. In the developed world, demand for government support – the traditional source of relief – is rapidly outpacing supply. At the same time, disability levels are rising due to an aging population, tighter labor markets and improved medical diagnosis, which can confirm illnesses and disabilities such as mental health problems that were not recognized, let alone treatable, in the past.

Mindful of the challenges, Zurich Insurance Group, the global insurer, and the Smith School of Enterprise and Environment at the University of Oxford embarked in 2015 on a longer-term project to study income protection gaps.

Gaining better insights into key challenges

To better understand people’s attitudes toward income protection, this latest study by Zurich and the Smith School, the second in a three part series, examined many of the factors contributing to IPGs. Surveys done with individuals in Australia, Brazil, Germany, Hong Kong, Italy, Malaysia, Mexico, Spain, Switzerland, the UK, and the U.S., in March and April 2016, and later in the United Arab Emirates (UAE), aimed to learn about people’s awareness, knowledge, and experiences of income protection insurance.

The information has relevance both for those seeking to protect themselves, and in many cases their employers, as well as providers of income protection products and services. Ultimately, the information obtained in this study points the way toward possible improvements in the approach, and general issues of relevance to public policymakers and others.

Experience plays a greater role than financial literacy

One of the most important and surprising findings of the survey was that having first-hand experience, or (to a lesser extent) knowing someone who has had such experience with income protection gaps, was one of the biggest factors influencing demand. Experience trumps formal or abstract knowledge of insurance. Moreover, this holds true across all income levels. This is confirmed by behavioral research demonstrating that ‘subjective knowledge’ gained through life experience has a much more significant influence on people’s actions and decision-making than ‘objective knowledge,’ which is abstract and formally learned. People who have income protection insurance are not necessarily more financially literate. A potential area for future investigation would be how to replicate experience before something bad happens, including through the use of technology-based solutions.

Misperceptions about the cost of income protection

The main reason people cited for lack of income protection insurance was a perceived high cost. But how much they would be willing to pay for such insurance – on average, remarkably consistent at 5 percent of respondents’ monthly income – was considerably higher than the average cost of income protection insurance for most people. Clearly, people’s perceptions about the cost of income protection need to be examined and, where it makes sense, addressed.

Men and full-time workers are more likely to be insured

Gender gaps existed in about half of the countries surveyed, particularly those where overall demand for insurance was lower. Men are more likely to have insurance overall. But in some countries, an individual’s position in the household as a primary or secondary wage earner played a greater role determining demand for insurance: sole or primary wage earners are more likely than secondary earners to have insurance.

Income Protection solutions and advice: the perceived and preferred role for employers and governments

Appetite for income protection may reflect a reliance on public programs in countries where a relatively high level of security has traditionally been available. This could become problematic in countries with high levels of state support as access to benefits is curtailed, and claims periods are shortened.

Professor Clark puts it: “There's a realization amongst many people, regardless of what country they live in, that there's an increasing gap between what governments should do and what they actually do.” Governments still have an important role to play. For example, for many, they are the preferred provider of income protection cover. In today’s world of constrained public budgets, most likely this role will be realized in the form of public-private partnerships, or ‘PPPs.’

Professor Clark encourages us to consider the UK’s National Employee Savings Trust (NEST); a government-sponsored private solution that understands the shortfall of employers providing adequate pension savings systems.

“A NEST-type institution is particularly effective in a flexible labor market, where people are moving from employer to employer, and even across industries.

And it's not just about pension savings, we need to introduce this model to disability insurance too. We need more of these type of collective institutions that are going to pick up - particularly at the lower end of the labor market, approximately one third of the employed people in this country.”

For those who do not work for large companies or sharing platforms, other avenues must be found to form partnerships to close the income protection gap. Pooling such groups together, perhaps across industries or even geographies, would help to diversify risk, thus stabilizing prices for such individuals.

But the responsibility to enforce this change reverts back to the governments, according to Professor Clark: “It's notable when you look at continental Europe, particularly Germany, some of the so-called agile startups such as, Uber, are essentially being forced to abide by what a taxi company provides a German employee.

There’s a realization amongst governments across the world that such companies have taken advantage of the lack of regulation, and actually, the long term consequences on the working population are quite adverse.”

The fact that a majority of people would prefer income protection cover as part of a benefits package, even if this means slightly lower take-home pay, shows the potential value of offering income protection insurance through the workplace. Workplace solutions typically involve income protection-related insurance coverage as well as rehabilitation services and prevention and well-being initiatives. But, in practice, employees may not know much about income protection, and may not be aware of its availability; they may fail to understand its importance to them. In addition, such arrangements tend to be most prevalent amongst large employers and multinational companies, meaning they are not currently an option for the majority of workers.

The diversity of preferred sources of income protection coverage and advice, from banks to employers to insurers and insurance brokers, points to a need for multiple-solution models that include both the public and private sectors.

A changing workforce

The changing nature of labor markets already has major implications for the way workers access income protection. An increase in short-term contracts and part-time positions is leaving many workers exposed to risk. There is an urgent need to design new channels for income protection solutions that are both ‘portable’ (across jobs and borders) and appropriate to different country contexts.

“Rising income and wealth disparity” ranks third as a driver of global risks over the next 10 years, according to The Global Risks Report 2018, published by the World Economic Forum.

Professor Clark says that outmoded income protection policies could be a trigger for this driver of global risks: “Large organizations will retain and maintain income protection policies for three reasons: productivity, flexibility, and loyalty. However, on the contractor basis, that's very unlikely.

There is a risk that, unless there is government regulation, country by country, that fundamentally enforces a minimum benefit associated with those contracts, the dynamic could contribute to growing wealth disparity. We will be strengthening the privileged elite, while isolating an unskilled workforce that is increasingly employed on a non-permanent basis. 

About this study

The report is the product of a collaboration between Zurich Insurance Group and the Smith School of Enterprise and the Environment, University of Oxford.


Embracing the income protection gaps challenge: options and solutions (pdf)